Closing the UK Competitiveness Gap

Closing the UK Competitiveness Gap

Article excerpt

Introduction

Improving national competitiveness has become a key policy theme of the 1990s. The UK Government has published two White Papers on competitiveness (HMSO, 1994 and 1995) and is committed to producing a third in 1996. The US, Germany, Canada, Australia and Spain are some of the other countries that have published similar reports. The European Commission has followed up its 1993 White Paper entitled Growth, Competitiveness, Employment with the establishment of a high level Competitiveness Advisory Group.

Yet the concept of national competitiveness has been attacked by many leading economists. Krugman (1994), for example, has said that 'competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous'.

Two main criticisms have been made of competitiveness as a guide to policy. The first is that the competitiveness of a nation (rather than that of a firm) has no agreed meaning in economic theory and can therefore mean different things to different people. Corden (1994) identifies three different measures of national competitiveness in common usage: sectoral competitiveness; relative cost competitiveness (the real exchange rate); and productivity.

The UK White Papers, like Porter (1990) and the US Competitiveness Policy Council (1993), use the third of Corden's definitions by viewing competitiveness as the ability to raise living standards. Competitiveness is defined as:

'the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term'. (HMSO, 1994 and 1995)

This definition focuses on productivity rather than on the real exchange rate. A country with low productivity levels may still be competitive in relative cost terms provided that its (nominal) exchange rate is low enough, but its living standards will generally be lower than those in countries with higher productivity levels.

The second criticism is that using competitiveness as a synonym for raising productivity in the domestic production of goods and services may encourage protectionism by giving a misplaced emphasis to countries as rivals, and to the role of trade and the balance of payments in economic performance. The UK White Papers recognise this danger and stress that trade is not a zero sum game and that living standards are determined by productivity growth and not by trade performance.

In spite of these criticisms, a long-term concept of competitiveness remains of use to policy makers for two reasons. First, because it emphasises international bench-marking. The key issue for policy is whether productivity in the UK is below its own potential, given its national preferences and technological capabilities, rather than the potential of other nations. However, there is much we can learn about economic policy and institutional arrangements from countries with faster (or indeed, slower) productivity growth than ourselves. Second, it implies that the search for improved economic performance is never ending. That is why the White Papers focus on international comparisons of performance over the long term.

The Government's Competitiveness Analysis

Living standards are generally approximated by real output per head measured at purchasing power parities. If output per head grows then the real incomes of the population can increase. If output per head grows faster in one country than in others, the real incomes of its population will increase more rapidly. Raising output per head is therefore a central objective of Government policy. In 1994 the UK's output per head was the 16th highest in the OECD. However, only Luxembourg, the US and Switzerland exceeded UK GDP per head by more than 20 per cent [ILLUSTRATION FOR CHART 1 OMITTED].

Productivity is a key determinant of living standards in the long run. …